RUPEE DEPRECIATION – INDUSTRY IMPACT
January 9, 2012
Backdrop
The rupee has, between August and December 2011, depreciated by 21%. This depreciation has
caused much concern among industry groups as imports have become expensive, thereby amplifying
costs of production and operation, and ultimately profitability. Given that India is a net importer
with a sizable trade deficit, the net impact has to, a priori, be negative.
Objective
The aim of this study is to identify
vulnerabilities on forex exposures, on account
of depreciation of the rupee against the
dollar, across various industry segments based
on a simulation analysis of FY11.
We began with a universe of 7,691 listed
companies to be used in this study. The
sample contains 1590 listed companies (from
this universe) that are characterised by forex
expenditure of greater than Rs 10 crore (US $
2 mn). The sample is representative of trends
discussed here as forex earnings by these
1590 companies accounts for 97% of total
forex earnings by all 7,691 companies. Total
forex earnings of these 1590 companies
account for around 60% of India’s exports of
goods and services in FY11.
These companies have further been classified
into 19 broad industry groups1. We use net
foreign exchange earnings of these companies
as a proxy for their forex exposure. Based on
trends observed in FY11, we rank industries
on their expected forex risk, in the absence of
hedging.
Results
Of the 19 industries, 4 have been net gainers
in forex earnings, the highest being recorded
1
6 sub-industries in the chemical industry and 1
sub-industry in non-metallic mineral industry have
been identified
Study: Industry Impact of Rupee Depreciation
by IT, followed by textiles, two wheelers and
commercial vehicles. The remaining industries
have registered net forex earnings outgo, the
highest in chemical industries and lowest in
passenger vehicles. Higher raw material
import cost has been the prime contributing
factor to this trend. These vulnerabilities
remain in the absence of unhedged positions.
Forex Earnings
With a depreciating rupee, the value of
exports would naturally increase. Hence
export-oriented industries would post gains in
forex earnings. Of the 19 industries under
consideration, export earnings contribute
more than 99% to forex earnings in 8
industries. Table 1 lists the top 10 forex
earning industries. Netting forex earnings for
forex expenditure – IT and Textiles emerge as
clear gainers against a depreciating rupee.
Table 1: Top 10 Forex Earners (US $ Mn)
Industry/
sub-industry
Chemicals
Petroleum prod
IT
Non-metallic min.
Ferrous metals
Textiles
Food
Non-ferrous met.
Mining
Construction
Non-elect. mach.
Net forex
earnings
(79,477)
(74,442)
14,483
(1,290)
(10,418)
3,072
(1,368)
(3,590)
(5,350)
(2,003)
(2,597)
Total
exports
61,643
45,981
25,199
9,621
7,672
6,946
4,744
4,688
4,682
3,483
1,752
Source: CMIE
1
Table 2: 10 Largest Spenders in Forex (US $ Mn)
Forex Expenditure
Table 2 lists 10 industries that have the
highest forex expenditure. These industries
would be affected by higher input costs on
account of a depreciating rupee.
IT is evidently an outlier here – though forex
expenditure is substantial they are offset by
higher forex earnings, yielding an overall
positive net forex earnings position.
Industry /Segment
Chemicals
Petroleum prod
Ferrous metals
Non-metallic min.
IT
Mining
Non-ferrous met.
Food
Power
Construction
Non-elect. mach.
Net forex
earnings
(79,477)
(74,442)
(10,418)
(1,290)
14,483
(5,350)
(3,590)
(1,368)
(5,583)
(2,003)
(2,597)
Forex
Expenditure
1,41,120
1,20,361
18,090
10,911
10,717
10,032
8,277
6,112
5,759
5,486
4,349
Source: CMIE
Table 3: Profile of Forex Expenditure (Share in total)
Industry /Segment
All
Non ferrous metals
Ferrous metals
Non-electrical machinery
Construction
IT
Textiles
Electrical machinery
Electronics
Chemicals
Raw mat
66.4
90.9
88.1
85.2
70.6
67.8
66.1
65.5
64.8
62.3
Finished goods
9.9
4.9
6.1
1.2
2.3
3.8
13.4
10.3
13.1
21.7
Capital goods
7.4
0.6
1.2
7.1
14.0
7.6
7.3
9.0
3.2
3.0
Stores
2.6
0.5
0.6
3.0
6.3
1.2
2.7
4.3
1.1
0.7
Interest
0.9
0.3
0.4
0.9
2.0
1.2
0.4
1.2
0.3
1.1
Source: CMIE
Table 3 provides a profile of forex
expenditure. Forex expenditure across
industries is concentrated in raw material
costs (2/3 of total) and expenditure on
finished goods, capital goods, inventories,
interest and dividend.
Metals
and
non-electrical
machinery
industries are by far most affected by raw
material forex expenditure, the same
contributing more than 85% to total forex
expenditure in these industries.
Study: Industry Impact of Rupee Depreciation
Financials of gems and jewellery and some
chemical based industries such as petroleum,
fertilizers and pharmaceuticals would also be
impacted by higher raw material expenditure.
As we move to other industry segments, the
heads of forex expenditure get more
diversified. Industries such as IT, Telecom
services, auto ancillaries, mining and
commercial vehicles have significant
contribution under expense heads of
technology royalties, remittances and travel.
2
Industry Impact
Based on the profile of forex income and
expenditure flows, below are identified some
industries and industry segments that are
most likely to be affected adversely by a
depreciation in the rupee. It may be noted
that these inferences are drawn under ceteris
paribus assumptions based on performance
in FY11 and in the absence of hedging.
Trends this year seem to replicate FY09 trends
when the rupee deprecated more than 15%
and global economic conditions were bleak.
were to contract, currency gains would
dominate.
IT – the sharp depreciation in rupee is
expected to boost software sales and forex
gains in coming months
o

Table 4: Gainers and Losers
Industry
Gainers
-
-
Losers
IT
- Chemicals
Textiles
- Ferrous metals
Two wheelers
- Power
Commercial
- Mining
vehicles
- Non ferrous metals
- Non-electrical
machinery
- Construction
- Electronics
- Telecom services
- Food
Industry Segment
Gainers
Losers
Pharmaceuticals
- Petroleum Products
Gems and
- Fertilizers
jewellery
- Polymers
- Tyres and tubes
- Cosmetics

Risk factors
For the Gainers - With bleak macro-economic
outlook governing producer sentiments and
consumption demand; exporters of IT
services, textiles, pharmaceuticals and gems
and jewellery could witness a reduction in
global demand for goods and services.
However, even if buoyancy in export volumes
Study: Industry Impact of Rupee Depreciation

Remittances, travel expenses and
dividends
could
increase
outflows, however, they are
unlikely to cause an abrasion in
the P&L position of these
companies
Textiles – with easing of cotton and
cotton yarn prices and improved export
realisations, the textile industry is
expected to gain in the current forex
environment. Mark-to-market losses on
existing hedged positions and suitability
of new hedging contracts would be crucial
determinants of overall profitability
o The man-made fibres segment
could face some pressure on
account of higher import costs of
inputs and marked-to-market
losses on expenses. Dollardenominated expenses could lend
some offsetting support to
margins
Pharmaceuticals – companies in this
industry are net exporters and stand to
gains through higher export realisations
enhanced by a depreciating rupee
o Losses on external commercial
borrowings (ECBs) and limited
feasibility of conversion on
foreign currency convertible
bonds (FCCBs) pose a concern to
these companies, but are not
expected to be huge
Gems and jewellery – with increased
investment demand amidst a volatile
global economy, prices of gold and other
metals, which are inputs to this industry,
have witnessed steep rise. Consequently
3
the sectors profitability could be affected.
However, the sector is export-oriented
and is expected to gain against the rupee
depreciation trend
For the Losers - Downside risks for losers
could magnify with rapid depreciation of the
rupee. Industries such as chemicals especially
petroleum and fertilizers, ferrous metals,
power, are metals/minerals-based industries.
Lower production levels in metals and
minerals manifested in increased prices of
these commodities in 2011. Global prices of
metals and minerals have moderated
recently; however supply shocks causing
spike in input costs coupled with rupee
depreciation could magnify the adverse
impact on the bottom-lines of these
industries.


Ferrous metals – steep rise in prices of
coking coal and iron ore aggravated by
adverse rupee movements is expected to
continue to pressure raw material costs
for this industry and allied segments.
o Rather
muted
industrial
production and investment
activity in this industry on
account of a tighter monetary
regime could further manifest
in contraction of supply
Power – thermal power plants are
expected to face some strain on account
of higher import costs of ferrous metals
and petroleum products, which in turn are

expected to remain firm in the near
future. Furthermore, some OMCs have
restated assets in rupee terms and are
likely to face added pressure in coming
months
Fertilizers – the industry imports about
50% of its raw material requirement. In
Q3 FY12, raw material expenses rose
sharply by nearly 20% on account of
higher input costs against elevated global
prices and depreciation in rupee
o Potassium chloride is one of
the major import items and a
decline is already being
observed in the same. This
trend is likely to continue in
the coming months along
with a decline in sales
Conclusion
We expect the rupee to settle in the range of
Rs 52-54 to a dollar by the end of this fiscal.
This could, ceteris paribus, turn out a positive
for export-oriented industries such as IT,
textiles, pharmaceuticals and gems and
jewellery. On the other hand, industries based
on metals, minerals and chemicals are
expected to be under some pressure and the
extent of hedging will determine final net loss
on account of rupee depreciation. While these
inferences are based on performance
recorded in FY11, the final outcome is
expected to follow the trend barring
aberrations on account of hedged positions.
---------------------------------------------
--------------------------------------------------------------------------------
Analyzed by:
Contact:
Krithika Subramanian,
Madan Sabnavis,
Associate Economist
Chief Economist
krithika.subramanian@careratings.com
madan.sabnavis@careratings.com
91-022-675343521
91-022-67543489
 Petroleum products – Delays in
-------------------------------------------------------------------------------------------------------------------------------disbursements of cash subsidies by the
Disclaimer
government to OMCs against a likely fiscal
The Report is prepared by the Economics Division of CARE Limited. The Report is meant for providing an analytical view on the subject and is
not a recommendation made by CARE. The information is obtained from sources considered to be reliable and CARE does not guarantee the
accuracy of such information and is not responsible for any decision taken based on this Report.
Study: Industry Impact of Rupee Depreciation
4